The world is buzzing with the news of the United Kingdom’s withdrawal from the European Union. Despite the talk and speculation, experts just don’t know what will happen. Whatever the outcome it could not have come at a worse time. Economic growth in most of the world is anemic, if occurring at all and global economic conditions are important for Montana because some of our major products, such as grain and certain minerals, are sold on the worldwide market. So what in the world is going on?
Let’s start with Europe and the eurozone where the economic recovery remains lethargic. Throughout 2016, it will probably expand at the same slow rate experienced in 2015. The main culprit is stagnant domestic demand combined with tight credit conditions imposed by the European Central Bank, which leaves the economy vulnerable to external shocks. The influx of migrants and Brexit certainly fall into that category.
The good news is Germany and France, where Moody’s Analytics projects 2016 real GDP growth of 1.3 to 1.5 percent. At the other end of the spectrum is Italy, Greece, Portugal and Spain. These countries are seeing unemployment rates well into double digits, with Greece topping out at 24 percent, Spain at 20 percent and Portugal at 12 percent.
Hanging over the entire region is the potential for an energy crises. The unresolved situation between Russia and Ukraine could result in a sharp drop in energy supplies to Western Europe and a corresponding rise in prices.
In South America there is not a lot of good news there either. The economy there continued to decelerate in 2015 making it the fifth year of slowing growth rates for the continent. The Brazilian and Venezuelan economies shrunk thanks to sluggish global demand, combined with falling commodity prices and political instability.
Global economics are important for Montana because our products are sold on the worldwide market.
Brazil is the largest economy in South America. It declined almost 4 percent in 2015 and Moody’s Analytics projects a further decline of roughly 3 percent this year. Meanwhile, Venezuela continues to be plagued by low oil prices and rampant inflation.
The Mexican economy continues to expand and inflation remains moderate. Low oil prices remain a concern, but seem to be the only major issue. Real GDP increased 2.5 percent in 2015 and Moody’s Analytics projects a 2.2 percent rise in 2016. With predictable monetary and fiscal policies continuing to provide a stable financial environment, growth may reach 3 percent in 2017.
In India growth looks good, but could be better. Moody’s Analytics projects growth in 2015-2016 to be 7.5 percent. That could go as high as 10 percent, but investment in infrastructure remains listless and low capacity utilization suggest that Indian factories could produce more.
The Chinese economy is slowing, but nobody really knows by how much. Official statistics show only a moderate deceleration to a 7 to 8 percent annual growth rate. But private non-government sources paint a much darker picture with estimates showing annual increases in the 2 to 3 percent range.
Japan may be heading into another recession. Interest rates are currently negative, the Yen is rising with negative impacts on exports and there is no inflation. The Bank of Japan is attempting a counter-cyclic monetary policy, but does not have many viable options. Government forecasts are for 1.5 to 2 percent real growth in FY 2017, but private projections are far less optimistic.
Finally, the Canada economy is finding life after oil. Declining energy prices hit the economy hard and sent the Canadian dollar into a nosedive. In 2015, economic growth was barely positive, but improved worldwide prospects associated with the Canadian currency devaluation will switch the stimulus from oil and gas to manufacturing and other export sectors. The Royal Bank of Canada (RBC) forecasts GDP growth in 2016 and 2017 to be in the 1.7 to 2 percent range, slightly slower that in the United States.
Right now, the major risks to the world economy are:
• Debt and refugee crises dominating the eurozone with the overhang of an energy crisis.
• Instability in the Middle East and North Africa that could further exacerbate refugee issues.
• The slowdown in the Chinese economy, which could be worse than expected by the government.
• The political instability and resource dependence in South America and Africa could hamper significant recoveries.
Overall, this outlook suggests more downside than upside risks. In other words, there is a greater chance that things will get worse rather than better.